The spying row between Australia and Indonesia has intensified with President Susilo Bambang Yudhoyono ­suspending joint military co-operation over people smuggling as part of a decision to officially downgrade the status of the relationship.

Tony Abbott
responded by telling Parliament on Wednesday night that he would reply to Dr Yudhoyono’s written demand for an explanation “swiftly, fully and courteously" but, for the third time, stopped short of offering the ­apology which some others in Indonesia are demanding.

“I want to express . . . my deep and sincere regret about the embarrassment that’s been caused to the ­President and Indonesia that’s been caused by recent media reporting,’’ Mr Abbott said.

Mr Abbott said he was encouraged by Dr Yudhoyono also reaffirming the strength of the relationship in his statement and Mr Abbott restated his own commitment to building a strong and friendly relationship.

One government source said the opening of official communication channels by Dr Yudhoyono presented an opportunity for a breakthrough.

Dr Yudhoyono spoke out after Mr Abbott told Parliament during the afternoon it would be wrong to “over-react’’ to anger caused by revelations Australia had tapped the phone of Dr Yudhoyono, his wife, and eight ministers in 2009.

The President said the co-operation bans would remain until he had received an official explanation and apology from the Prime Minister. He said Mr Abbott’s comments had been aimed at “Australia’s domestic community" and were inadequate.

The bans include a halt on intelligence sharing; joint military exercises, of which there are currently five under way or scheduled; and other co-operation to combat people smuggling .Apart from people smuggling, there could be implications for illegal fishing, piracy and counter-terrorism.

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He also called for a binding code of conduct between the countries to ­govern future behaviour.

“It is not possible that we can continue our co-operation when we are still uncertain that there is no spying towards us, spying towards our ­soldiers," Dr Yudhoyono said.

“God willing tonight I will send a ­letter to Tony Abbott demanding Australia’s official stance and explanation on the tapping incident."

In Australia, beef exporters, rural MPs and others in the business community began to express concern at the potential implications of a drawn-out diplomatic conflict, especially as Indonesian Trade Minister Gita Wirjawan listed live cattle and agriculture as areas that could be reviewed.

Elders chief executive officer ­Malcolm Jackman, whose company is the premier exporter of live cattle to Indonesia, said it was too early to hit the panic button especially as export numbers for the next three months had been agreed upon.

“All of us are just sitting back taking a deep breath and just waiting to see what evolves,’’ he said.

“We are hoping this issue won’t impact trade in any shape or form.’’

One Coalition MP who did not want to be identified urged Mr Abbott to pick up the phone and sort the issue out, as United States President and German Chancellor Angela Merkel did when the US tapped her phone.

“I think this is going to make it more difficult to re-establish the beef trade when so many producers have been hurt by the previous government ," the MP said.

“This needs to be settled. President Obama has set a precedent as to how these issues need to be handled."

In an interview with The Australian Financial Review one of Washington’s former diplomats for the region, Kurt Campbell, said both countries should step back from the brink.

“Both sides need to take clear and subtle steps to stand down from what could be an escalating and unfulfilling public confrontation," the former US assistant secretary for East Asia and Pacific Affairs said.

But he declined to endorse Mr Abbott providing an apology to President Yudhoyono, saying it was not the place of a former US diplomat to offer such advice.

“The Abbott government has tried to express contrition and is seeking to send a message they want a better relationship," Dr Campbell said.

He said undoubtedly the uncertainty over what fugitive US whistleblower Edward Snowden had pocketed and whether there was more to come was behind Australia’s reluctance.

But he said intelligence sharing between the two countries, particularly on threats like radical Islam, was simply too vital to be jeopardised for the rift not to be settled.

A senior government source confirmed this theory, saying Mr Abbott had to tread lightly given the government did not know what other material about Indonesia or some other regional leader may exist and be leaked.

Dr Yudhoyono went public after Australia reportedly tried behind the scenes to settle the matter. The spying occurred in 2009 and was recently revealed in information leaked by Mr Snowden.

Marciano Norman, chief of the Indonesian State Intelligence Agency (BIN), said his organisation had ­spoken to Australian intelligence ­officials. “Indonesia's intelligence body has communicated directly with Australian intelligence and in our communication, they stated that now and in the future, the most important thing that it won't happen again," Mr Norman said.

“That's their language, now and in future, they assured that it won't happen again."

The Abbott government would not confirm or deny any such exchange.

Mr Abbott was defiant during question time when asked by Opposition Leader Bill Shorten what he had done in the past 24 hours to repair the relationship.

“This is a serious matter. As I said [on Monday] I deeply and sincerely regret the embarrassment that media reports have caused to President ­Yudhoyono who is a very good friend of Australia, perhaps one of the very best friends that Australia has anywhere in the world," Mr Abbott said.

“I do understand how personally hurtful these allegations have been, these reports, have been, for him and his family. I do note that there have been allegations and even admissions in the past on this subject.

“People didn’t overreact then and I certainly don’t propose to overreact now. My intention notwithstanding with difficulties of these days is to do everything I reasonably can to help to build and strengthen the relationship with Indonesia which is so important for both our countries.'’

Indonesian Foreign Minister Marty Natalegawa announced the relationship had been downgraded.

“We are turning off the tap by degrees," he said.

The Coalition’s pollster, Mark ­Textor, was prolific again on Twitter in playing down the import of the incident, a sign being widely perceived that Mr Abbott was being advised the issue was not damaging him domestically. Among dozens of tweets, Mr Textor said: “Apology demanded from Australia by a bloke who looks like a 1970s Filipino porn star and has ethics to match."

President of the Western Australian Farmers’ Federation, Dale Park, called for “good diplomacy" to avoid repercussions for the live cattle trade, which Mr Abbott vowed to try and restore when he travelled to Indonesia after being sworn in.